Carmakers take divergent roads in Russia

General Motors' decision last month to end production and a large chunk of its sales in Russia looked ominous for the country's car market. Three years earlier, the US auto giant had expanded the same St Petersburg factory it now plans to mothball by midyear, proclaiming Russia to be one of the world's fastest growing markets.

Last Friday, however, GM's big US rival Fordwent the opposite way. It said it was taking control of its joint venture with Russian manufacturer Sollers and putting in more money.

The divergent responses highlight the dilemma now facing global automakers that piled into Russia when, along with the other Brics members, it was seen as vital to the industry's future growth. Do they tough out the current dire conditions and wait for a recovery that may be years coming - or take the drastic step of bidding do svidaniya?

"It's quite unprecedented really for a major global [auto manufacturer] to leave a major geographical region," says Tim Urquhart of IHS Automotive, a consultancy.

Yet the incentives to follow GM might seem strong. Russia's auto market is arguably the sector hardest hit by the economic impact of low oil prices and western sanctions.

The plunging rouble has put a severe squeeze on foreign manufacturers. It not only makes their imported cars less affordable for consumers, but also affects their Russian-assembled cars because of the relatively high proportion of imported components in a country whose auto parts industry remains under-developed. GM says locally sourced content of its vehicles in Russia is less than 50 per cent, and the market environment cannot justify further big investment in local production.

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Premium car sales are proving more resilient, and GM will continue to sell higher-end vehicles including Cadillac and some US-built Chevrolet models in Russia. The January-March figures may also be particularly bad overall because buyers took advantage late last year of a government-backed trade-in or "scrappage" scheme for older models, which pulled forward sales.

Russia's government is trying to prop up the market with a subsidised loan scheme for car purchases. However, IHS forecasts full-year car sales will fall 32 per cent this year, on top of a 10 per cent fall last year, and not return to pre-crisis levels before the decade is out. Russia was once forecast to overtake Germany to become Europe's biggest car market in the same timeframe.

But while many groups are cutting production, other foreign carmakers in Russia look more likely to emulate Ford than to quit like GM. For one thing, pulling out of markets also has a cost - GM is taking a $600m charge. So does re-entering them if things eventually recover.

GM is committed to returning its European business to profit next year for the first time since 1999, on the way to a long-term 5 per cent margin target. Ironically, its bigger Russian presence than Ford - it sold 189,000 cars there last year against Ford's 66,000 - makes the downturn even more financially painful for it.

The world's number three carmaker is also under pressure to deploy capital more selectively. Some analysts have praised GM for its hard-headed realism in exiting Russia, after similar moves in other difficult emerging markets, including pulling out of manufacturing in Indonesia.

But for groups with Russian partners such as Renault-Nissan, which has a majority stake in market leader Avtovaz, or Ford with its Sollers venture, extricating themselves can be trickier. Renault, in particular, has arguably bet too much on Russia to pull out. So, too, have South Korea's Hyundai and its affiliate, Kia, which are together the largest non-Russian producer in the market.

So apart from GM, global carmakers are likely to be in for the long haul in Russia. For those still waiting to make any profit there, however, the road ahead may be very long and winding indeed.

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